Nomura

Ten years after the financial crisis: a more stable financial system with new risks

  • A decade after the financial crisis, discussions are centered around a potential downturn on the horizon.
  • Post-crisis rules have made systemically important banks more shock resistant
  • However, leverage in the non-financial sector poses a risk to the global economy
  • Unregulated FinTech lending could pose a significant risk

The tenth anniversary of the financial crisis is a good time to discuss the state of the markets and how prepared we are for the next slump. The crisis battered markets so badly that observers have been trying to pinpoint the likeliest sources of future downturns ever since. Now, as concerns grow, that the world’s largest economies are slowing, many wonder whether a new crisis is imminent. While most macroeconomic fundamentals appear benign, risks remain. Look no further than the threat that highly leveraged companies pose to the global economy.

But investors have legitimate reasons to feel more secure today. During the crisis, the Fed stepped in and averted disaster. Regulators and lawmakers followed by enacting measures to head off future catastrophe. The system held, emerging with substantial legislative and regulatory changes. Post-crisis rules made systemically important banks more shock resistant. And the markets still have faith in central banks’ and regulators’ institutional prowess and will to provide liquidity and bolster confidence.

Still, as we learned a decade ago, new risks can spiral into new crises. Start with FinTech lenders. They’re unregulated, mostly opaque sources of often levered and unrated credit, with funding that’s less correlated to the fed funds rate. We don’t know how these lenders will respond during a crisis. Regulators are constructing legal frameworks to incorporate them, but no one knows exactly what they’ll entail. And when a crisis hits, we don’t know what form the backstops will take. That creates a lot of uncertainty for the next liquidity, credit or sovereign risk event. Investors can and should make this calculus a part of their strategy as we enter the next phase of this cycle.

Contributors

  • Greg Hertrich

    Head of US Depository Strategies

  • Isha Sinwer

    U.S Depository Strategies

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